Credit Suisse Research: A Review Of The 3 Singapore Banks

With the US Federal Reserve continuing to push up interest rates, what will be the impact of the rising rates in the US to Singapore and the three local banks?

The rise of interest rate in Singapore has lagged of those in the US. That may be attributed to various factors including a stronger SGD, sluggish economic growth in Singapore and domestic liquidity.

The street expects Singapore’s interest rate will catch up with the US rates in the subsequent hikes. However, the expected Net Interest Margin (NIM) of the banks have been trimmed as the street holds back some expectations.

Preview of the coming quarter

Asset quality, which was the main issue for the banks in recent quarters, should remain stable in the coming quarter.

Growth is expected to be within the range of high single digit to low teens. Management of the banks is expected to revise their NIM guidance as a result of slower NIM expansion.

Potential increase in dividends can be expected as Singapore banks may solidify their capital position through optimisation of Risk Weighted Assets (RWA).

Analysts from Credit Suisse Research feels that investors could invest in the sector as short-term price weakness from the lower NIM guidance will provide a good entry point.

DBS Group Holdings Limited

Source: DBS Group Holdings Limited, Bloomberg

Being the largest bank in Singapore, DBS has the most exposure to interest movement in SIBOR/SOR. Its Current Accounts and Savings Accounts (CASA) to total deposits are the highest among local banks at 62 percent. That will mean that DBS’s cost of lending will rise more than the other banks.

On the asset side of its balance sheet, an approximate $60 billion of the loans are floating rates that are priced off SIBOR/SOR, which will lead to higher profits when interest rate rises.

From the diverging interest rates between the US and Singapore, the forecast of NIM for DBS is lowered from 1.78 percent to 1.74 percent. After adjusting for changes in noninterest income and operating expense assumptions, analysts from Credit Suisse Research expect a net impact of -4.7 percent to 0.2 percent for DBS.

For FY2017, DBS is expected to raise its dividends from $0.60 to $0.65. This expectation is because DBS has the strongest Tier 1 Common Equity Ratio (CET1) among the local banks. Based on estimations, DBS has an excess capital of $3 billion or $1.20 per share.

Analysts from Credit Suisse Research reiterated their “Buy” call towards DBS Group Holdings Limited (SGX: D05) with a higher target price of $22.70.

United Overseas Bank Limited

Source: United Overseas Bank Limited, Bloomberg

In the previous quarter, UOB saw its NIM expand by 0.04 percent through extending the duration of its interbank and securities book. UOB has the potential to offset the laggard effect in local interest rates through further extending its duration and diversifying into other asset classes.

Overall, the forecast of net impact on its FY2017/18 profit is at 2.5 percent to 4.7 percent through an increased NIM to 1.73 percent and an adjustment in UOB’s non-interest income and operating expense assumptions.

An increase in dividend can also be expected from UOB from $0.70 to $0.75 as its current CET1 stands at 12.8 percent. Further optimisation towards its RWA will be the main expected driver of this.

Analysts from Credit Suisse Research reiterated their “Buy” call towards United Overseas Bank Limited (SGX: U11) with a higher target price of $25.60 despite the “Hold” sentiments from consensus estimates.

Oversea-Chinese Banking Corporation Limited

Source: Oversea-Chinese Banking Corporation Limited, Bloomberg

Previously, OCBC has guided its NIM lower which is likely to be to be done again in the coming quarters given the diverging interest rates between Singapore and US.

The estimated reduction in the FY2017/18 profit will be between 1.2 percent to 2.2 percent. Limitations for OCBC to raise its dividend are higher compared to DBS and UOB as OCBC has the lowest CET1. OCBC will likely be putting its effort to optimise its RWA to shore up more capital.

Analysts from Credit Suisse Research downgraded Oversea-Chinese Banking Corporation Limited (SGX: O39) to “Hold” and gave it a target price of $10.90.

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